Fiscal deficit monetary policies impact from "summary" of Indian Economy: Performance and Policies by Uma Kapila
The fiscal deficit has a direct impact on the effectiveness of monetary policies in an economy. When the government runs a high fiscal deficit, it needs to borrow money from the market to finance its expenditures. This increased borrowing puts upward pressure on interest rates in the economy. Higher interest rates can crowd out private investment as borrowing becomes more expensive for businesses and individuals. This can lead to a decrease in overall economic activity and slow down the growth rate of the economy. In such a scenario, the effectiveness of monetary policies in stimulating economic growth is reduced. Additionally, a high fiscal deficit can also lead to inflationary pressures in the economy. When the government borrows heavily from the market, it increases the mon...
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